Does Romney’s Tax Math Add Up?

One of the most contentious points in the two presidential debates, and really the focal point of this campaign, has been Mitt Romney’s tax proposal. Governor Romney’s proposal, a summary of which you can read here, is essentially to reduce income taxes for all Americans by 20%, eliminate interest, dividends, and capital gains taxes for those earning less than $200,000, eliminate the death tax, and repeal the alternative minimum tax (AMT). He also proposes reducing corporate tax rates to 25% to increase our competitiveness, switch to a territorial tax system, and repeal the corporate AMT.

Romney claims that all of this can be done in a revenue neutral way by eliminating certain loopholes and deductions, and through the economic growth that the tax cuts would stimulate. President Obama and his campaign, however, claim that this is impossible, that the numbers simply don’t add up. To support their claim, they primarily use a study done by the Tax Policy Center (TPC), a center-left project of the Urban Institute and the Brookings Institution.

The TPC published a report claiming that Romney’s tax plan would cost approximately $5 trillion over ten years, and would necessitate raising taxes on the middle class by $86 billion a year. The report, however, makes many assumptions (partially due to the fact that the Romney Campaign hasn’t given much in the way of specifics) that alters its findings.

Avik Roy, in a recent Forbes article, discussed these assumptions and why they’re misguided, and found that adjusting the TPC baseline to account for them results in a $40 billion surplus rather than an $86 billion deficit.

Since Romney hasn’t been specific about what loopholes and deductions he’d close, the TPC assumes that most of them are off the table. But, as Roy points out, that is not necessarily the case. Conservatives have long considered proposals such as eliminating the deduction for interest income on state and local bonds and income related to the inside build-up of life insurance products, as well as the step-up in basis of capital gains at death, as Curtis Dubay of the Heritage Foundation points out.

On top of this, Romney has recently proposed a unique solution to address the political difficulty of eliminating certain popular deductions, such as the carried interest deduction, the home mortgage interest deduction, and the child tax credit. As The Hill’s Justin Sink and Peter Schroeder address here, Romney has discussed the idea of capping deductions at $17,000 (he also mentioned a $25,000 figure in the last debate) which would allow individuals to use certain itemized deductions up to the designated number.

This proposal, in particular, runs in the face of the Obama Campaign’s claim that the Romney tax plan is merely a boon to the rich as a cap on deduction would affect high income earners much more than the low and middle class.

Furthermore, Roy goes on to point out that the TPC report includes Romney’s promise to repeal Obamacare (and the tax increases on high-income earner) without including the reduction in spending that would result. According to his calculations, adjusting for these spending reductions, the supposed “tax deficit” would be reduced by another $29 billion.

The most glaring assumption (or more specifically, lack of assumption) by the TPC is the fact that it uses static scoring. Essentially it assumes that reducing taxes by 20% will have no impact whatsoever on economic growth and the resultant change in tax revenue. As Stephen Entin, a senior fellow at the Tax Foundation, stated, “If one of the purposes of tax changes is to get the economy growing again, and you don’t bother counting that effect, you’ve overstated the cost of the tax cut.” Princeton economist Harvey Rosen argues that Romney’s tax plan can, in fact, be revenue neutral due to the fact that a stimulated economy as a result of reduced taxes would add between $25 and $58 billion in revenue.

This debate will undoubtedly continue through the November election and beyond because it is at the core of both candidates’ economic message. Romney could help himself a great deal by giving at least some specifics about loopholes and deductions he would close, but we also must make sure that we don’t allow candidates and organizations alike to manipulate and misstate reality.